Infrastructure As A Catalyst for Growth

We rely on infrastructure for a substantial portion of our daily activities; from the pipes carrying water to our taps; the roads we ply to work; the bridges we cross; the structures delivering the energy we access when our light switches are turned on, to the runways our planes land on and so on. Infrastructure can be dimensioned into economic and social categories. The former constitutes part of an economy’s capital stock at a given point in time and is used to facilitate economic production, or serve as inputs to production (e.g. electricity networks, roads, and ports). The latter- social infrastructure- refers to services such as health, education and recreation that directly and indirectly impact people’s quality of life.

Globally, infrastructure is synonymous with development and is instrumental to productivity, growth and social well-being. The World Bank estimates that a percentage increase in infrastructure stock in developing countries could raise GDP growth by as much as 1 to 2 percent. Furthermore, a detailed examination of the impact of infrastructure spending on job creation in Canada found that for every $1 billion in spending, GDP growth is boosted by $1.14 billion, resulting in a multiplier effect of 1.14 and 16,700 jobs (across construction, manufacturing, business services, transportation and financial sector employment). Other studies have shown similar effects, with estimated multipliers ranging from 1.14 to a high of 1.78.Understanding this effect is easy. For households, the availability of transport, electricity, clean water and sanitation, and other basic facilities has a tremendous impact on improving quality of life. For industry, infrastructure services facilitate production, transportation and trade, which spurs economic growth and helps in reducing poverty.

China’s Growth Miracle

At this time, China is perhaps one of the best illustrations of the impact of infrastructure on a country’s economic growth. Very few are unfamiliar with China’s growth rate which is a real economic phenomenon that has been studied by many development scholars. Many still marvel at how one of the poorest developing economies under communist rule transformed into the world’s second-largest economy in just over 30 years.

China’s average annual growth rate exceeded 9% for over 30 years. Hundreds of millions of people have been pulled out of poverty (its population living on less than $1/day drastically reduced to 8% in 2009 from 60% in 1980). Just 10 years ago, China ranked as the 5th largest economy and the 4th largest exporter in the world. However, by 2011, China’s GDP soared up to around $7.4 trillion, making it the 2nd largest economy and the biggest manufacturer in the world. Chinese education, science and technology have also developed by leaps and bounds.

These days, China’s importance is underscored by the sensitivity of countries and investors to even the slightest fluctuation of its economy and the prospect of a down turn sending jitters down the spines of investors globally.

So, what are the defining features of China’s growth? First, massive public investment in infrastructure and; secondly investment in human capital to increase productivity. Since 1992, China has spent at least, 8.5% of its annual GDP on infrastructure investment. This scale of this investment in absolute terms is massive; far exceeding what any other region or country spends including the United States and European Union.

Current State of Nigeria’s Infrastructure

With China’s story at the fore of our minds, let us bring the discussion home. Nigeria became the biggest economy in Africa in 2014, after an economic rebase nearly doubled the size of our GDP. At approximately $510bn, the Nigerian economy surpasses South Africa’s and is among the top 30 in the world. Despite these laudable achievements, our inadequate infrastructure continues to constrain our economic growth. The gap applies mainly to energy, transport, water and sanitation, but we are also struggling to develop our education, culture, tourism and healthcare infrastructure. Our core infrastructure stock is estimated at 20-25% of GDP compared to the 70% that middle-income countries of our size normally have.

In terms of power, we currently generate approximately5000MW of power with more than 50% of our population without access to electricity. Those fortunate enough to have some access to electricity, experience an average of 7 hours of daily black outs. According to the African Development Bank’s ‘Infrastructure Action Plan for Nigeria’, 80% of businesses in Nigeria depend on generators to power 61% of their power needs.

With regards to transport, less than 20% of Federal roads are paved, out of which, only about 27% are easily motorable. The situation is even worse for state and local government roads. When it comes to water and sanitation, a mere 4% of the population had access to piped water in 2010 compared to the 60% average for middle-income African countries. In addition, only 31% of the population had access to improved sanitation in 2010. The implication is that almost 110 million people in Nigeria did not have access to improved sanitation at that time. Some 12% of the Nigerian population in urban areas and 31% of the population in rural areas still practice open defecation.

The effects of this deficit on economic growth and on the living conditions of Nigerians are glaring. We know that when people lack access to basic infrastructure, their world of possibilities narrow. Therefore, for every naira that has been wasted on abandoned or poorly scoped projects, there is someone whose living conditions could have been significantly improved by well-directed investment. There are countless lost opportunities in terms of productivity, efficiency and quality of life as a result of investment that has been misdirected or withheld.

Needless to say, the infrastructure deficit also has significant impact on the ease of doing business in Nigeria. The 2015 Doing Business report ranked Nigeria 170 out of 189 countries, far behind South Africa and Ghana at 48 and 70 respectively, and also behind Niger at 168. Areas that Nigeria ranked particularly badly included getting electricity, registering property, paying taxes, dealing with construction permits, trading across borders and enforcing contracts.

How has Nigeria gotten to this point? The power sector is an apt case but the same views would be applicable to all the other sectors. The poor state of the power sector is the result of several years of under-investment and misappropriation of funds for new infrastructure, shortage of gas supply from gas producers, disruptions to gas supply, poor maintenance of existing facilities and rampant corruption and graft. Most of the power assets in Nigeria from generation to transmission to distribution were constructed or started in the 1970s during the oil boom but successive governments did not place a premium on maintenance and new investments. Neglecting necessary expansions for so long while the population of the country has almost doubled in the past 30 years has made access to electricity the most problematic obstacle to Nigeria’s growth. In addition, the sector has been subject to several years of mismanagement with successive caretakers not dedicating adequate attention to the sector’s financial viability and sustainability in terms of cost reflective tariffs and billing collection efficiencies.

Infrastructure Planning

The question then arises – how do we fix the problem? Planning is critical and a necessary first step towards closing the infrastructure deficit. China’s 5 year plans, now in their 13th version have been instrumental in keeping its policy goals and objectives in focus, articulating the policy actions and funding options necessary to facilitate the achievement of those goals.

In 2014, the Government of Nigeria released a long-term blueprint for infrastructure development titled the “National Integrated Infrastructure Master Plan” (NIIMP), the plan covers requirements for key infrastructural sectors including energy, transport, agriculture, water and mining, housing and regional development, information and communication technology, social infrastructure and security. It estimates that $3tn will be required in the next 30 years to build and maintain infrastructure adequately. Of those, energy and transport are prioritized and allocated the lion’s share of funding, requiring $1tn (a third of the total) and $775bn respectively over the next three decades.

Planning for the power sector and indeed all sectors must be proactive and futuristic. Today, for instance, over 70% of Nigeria’s power generation comes from gas plants, therefore the need for sustainable gas infrastructure and a broadening of the energy mix for electricity supply from hydro and gas sources needs to be factored into the sector’s infrastructure plans. Policies and regulations need to be proactive rather than reactive to accommodate and encourage investment in solar, wind, biomass/biofuels, coal and nuclear. Likewise, investment in transmission capacity must be prioritized and should also reflect new power generation sources. Finally, routine maintenance of infrastructure should be factored into plans to ensure that the network growth is in tandem with that of generation.

The blueprint is undoubtedly a step in the right direction but it is important to keep in mind that between independence in 1960 and today, at least half a dozen national development plans have been launched in Nigeria. However, their impact could be said to be far less than desirable mainly because they were all inadequately planned, poorly implemented and/or not continued by successive governments. With the National Integrated Infrastructure Master Plan, what is perhaps more critical is to ensure effective implementation of the right projects. Nigeria’s history is replete with “bridges to nowhere” and “white elephant” projects. Redressing this challenge would require improved planning techniques and proper risk management from execution to completion of projects.

For project implementation to be effective, resource allocation needs to be efficient with decisions taken objectively, based on credible data. This would go a long way to ensure that projects considerably improve the lives of consumers and users upon completion. Our infrastructure planning currently suffers from a data-deficit: too often we rely upon anecdote in lieu of real and solid data. We compare our needs with other countries. In power, our generation capacity is often compared with the likes of South Africa. Why, exactly? The real questions should be these: How much power does Nigeria need, or can it afford? Where is this power needed? How do we prioritise and deliver the supply to meet this demand? How do we allocate our scarce resources – including time – to achieve this? Any projection of power requirements should be based on econometric demand studies of the actual and expected needs of the current and projected domestic, commercial and industrial customers within our 774 local governments. There has been and remains a bottom-up component that is missing from many of our national plans.

Although the availability and access to data is necessary for infrastructure planning, it is by no means sufficient. There also needs to be a more scientific prioritisation of the supply and provision of these infrastructure services. The national habit of sharing the provision of infrastructure services cannot work. There needs to be a clear and objective prioritisation which understands that, where applicable, market-forces should be allowed the opportunity to provide solutions with minimum interference. Government should focus and apply its scarce resources to where it will have greatest impact and needs are unresolved.

Financing Infrastructure

One of the major inhibitors to investment in Nigerian infrastructure has been an absence of funding. According to the Infrastructure Master Plan, between 2014 and 2018, an investment of USD 166.1 billion (N26.9 trillion) will be required to deliver quality infrastructure. How will these investments be financed? The long-term maturity of infrastructure projects and their large scale require different types of financiers, including private sector, bilateral and multilateral partners. At N557 billion, the total capital expenditure of the 2015 budget is merely 2% of the $166 billion National Integrated Infrastructure Master Plan (NIIMP) says Nigeria requires to invest over the next five years. With the sharp decline in oil revenues, Nigeria clearly does not have the budgetary strength to make significant inroads in its infrastructure deficit without assistance. There is simply no way the Nigerian government alone can possibly finance infrastructure projects. Policymakers therefore need to engage and coordinate with many partners to create the enabling environment for private sector participation to flourish. This will require strengthening institutions, structures, process and capacities to ensure effective regulation, enforcement of standards and coordination of the implementation of the Infrastructure Master Plan. It would also require instituting the right incentives to attract private investment in the sector, which would flow if risks were properly allocated to the players best able to manage them. Investors of all types are keeping an eye on key measures needed to ensure the success of Nigeria’s power reform: from cost reflectivity of tariffs, to sufficient gas supply and transmission capacity to taking a judicious decision on the future of the transmission company.

Managing Risks of Infrastructure Projects

Large infrastructure projects have a reputation for being risky and costly and it is estimated that 90% of infrastructure projects[1]result in cost overruns, with costs on average 28% higher than anticipated. In Nigeria, overruns are often times far higher and have led to the abandonment of many projects. In order to improve the implementation and delivery of infrastructure projects, proper risk identification and management processes should be instituted from end to end. Risk identification and quantification when well conducted, estimate costs and benefits of projects and highlight the threats to the successful completion of the project early enough for mitigating actions to be implemented. Political risks include the risk of contract cancellations and delays in obtaining rights of way; economic risks include the risk of currency devaluations and demand forecast errors; community protests and unwillingness to pay are all real risks to infrastructure projects. Managing these risks appropriately is crucial to the delivery of such projects.

Conclusion

Paul Krugman, the Nobel Prize winning economist famously said that “productivity isn’t everything, but in the long run it is almost everything”. Sustained economic growth and individual prosperity in Nigeria would only be driven by increased productivity and the right decisions about infrastructure investment are critical to achieving this goal. However, it is important to acknowledge that getting infrastructure right is a challenge over many decades not one that can be quickly fixed. Leaders as they succeed their predecessors need to act in spite of vested interests and bureaucratic hurdles to provide what the long-term national interest demands. This in turn requires a national framework that is supportive and stable to incentivize the private sector to invest with confidence. It also means getting regulation right, so that consumers do not end up overburdened.

Onyia serves as the Chairman/CEO of TOL Consult USA and OrgLearning Nigeria.